Payroll records and obligations - Employer liabilities and r...

Learning Outcomes

After reading this article, you will be able to identify employer obligations in payroll processing, differentiate between statutory and voluntary deductions, record payroll transactions, and explain how and when remittances to external agencies should occur. You will also understand key payroll documents and the accounting entries required for ACCA FA1 exam success.

ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand how payroll is processed, the employer's responsibilities for payroll deductions, and how payroll obligations are fulfilled. Revision should focus on:

• Recognising employer liabilities arising from processing payroll transactions
• Identifying statutory and voluntary deductions from employee pay
• Recording payroll expenses and deductions in the accounting system
• Understanding the remittance process for amounts owed to tax authorities, pension providers, and other agencies
• Knowing the required documentation and control measures in payroll processing
• Preparing and posting payroll-related entries to the general ledger

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is a statutory deduction from employee pay?
   1. Pension contribution (employee)
   2. Charitable donation
   3. Income tax
   4. Sports club membership
2. On which document would an employee see the breakdown of their pay and deductions?
   1. Remittance advice
   2. Sales invoice
   3. Payslip
   4. Statement of account

3. Briefly explain the difference between net pay and gross pay.

4. True or false: Amounts deducted from employees' pay must be remitted immediately to the relevant authorities.

Introduction

Payroll processing creates important obligations for employers. Besides paying employees, businesses must also make payments to tax authorities, pension funds, and other agencies. Fulfilling these obligations correctly is essential for legal compliance and for accurate accounting records. This article covers what employer liabilities arise from payroll, how payroll deductions are calculated and recorded, and the process of remitting these amounts to the appropriate organisations.

Key Term: statutory deduction
A deduction from employees' gross pay required by law, such as income tax and social security contributions.

Key Term: voluntary deduction
A deduction made from employees' pay with their consent, for items such as pension contributions, union dues, or charity donations.

Key Term: net pay
The amount paid to an employee after all statutory and voluntary deductions have been made from gross pay.

Key Term: remittance
The transfer of money from the employer to an external agency, such as the tax authority or a pension provider, representing amounts deducted from payroll.

Employer Payroll Liabilities

Every pay period, employers are responsible for calculating and administering deductions from employees’ gross pay. This creates obligations to remit the deducted amounts to the correct agencies.

Payroll Deductions

There are two main categories of deductions:

• Statutory deductions: These are mandatory and include income tax and social security (such as National Insurance in the UK). Employers must deduct these by law.
• Voluntary deductions: These are made at the employee’s request or with their consent, such as pension contributions, charitable giving, or trade union subscriptions.

All deductions must be appropriately documented and supported by payroll records.

Breakdown of Payroll Expenses

Payroll activity gives rise to multiple liabilities:

• Net pay, which is owed to employees
• Statutory deductions, owed to government agencies
• Voluntary deductions, owed to third parties like pension schemes
• Employer payroll taxes and contributions, separately payable by the employer to authorities

After processing payroll, employers must pay employees their net wages and transfer all deducted amounts to the relevant bodies by specified deadlines.

Key Term: employer liability
A legal obligation arising from payroll, requiring the business to pay amounts owing to employees or external agencies.

Remitting Payroll Deductions

Employers act as intermediaries for statutory and voluntary deductions. It is not enough to withhold amounts from pay; these must be paid over—remitted—to external agencies on time.

• Statutory deductions go to tax authorities, usually monthly or quarterly.
• Employee pension and similar deductions go to the appropriate funds.
• Employer contributions (e.g., to pensions, state benefits) must also be calculated, recorded, and remitted.

Failure to remit can result in penalties, interest, and reputational damage.

Worked Example 1.1

Scenario:
Eastside Ltd runs a monthly payroll for its five employees in March. The figures are:

• Total gross pay: £10,000
• Income tax deducted: £1,800
• Employee pension contributions: £500
• Employer pension contribution: £600
• National Insurance (employee): £700
• National Insurance (employer): £750

Question:
What liabilities arise for the employer, and how are the remittances scheduled?

Answer:
The employer must:

• Pay net pay of £6,900 (£10,000 - £1,800 income tax - £700 NI - £500 pension) directly to employees
• Remit £1,800 income tax and £700 NI to the tax authority by the due date (e.g., by the 22nd of the following month)
• Remit £500 employee and £600 employer pension contributions to the pension scheme
• Remit £750 employer NI contribution to the tax authority

Posting Payroll Liabilities in Accounting Records

The business must record the following in the general ledger immediately after payroll is processed:

• Debit wages and salaries expense with the full gross wages and employer contributions (to reflect the cost)
• Credit bank (for net pay paid out)
• Credit liabilities for unpaid taxes, employee and employer contributions, and any other deductions until they are paid

This makes it clear what is still owed to employees and external agencies after payroll.

Payroll Remittance Documentation and Control

Businesses must securely manage records of:

• Gross and net pay for each employee
• Itemised deductions (statutory and voluntary)
• Employer contributions
• Payment dates for all remittances

Payslips are provided to employees showing gross pay, each type of deduction, and net pay. Schedules and supporting documentation should show when payments to agencies are made and the exact nature of each remittance.

Key Term: payslip
A document provided to an employee each pay period, showing their gross pay, deductions, and net pay.

Accounting for Payroll Payments and Remittances

When payroll is processed:

• Net pay is paid to employees immediately (generally by bank transfer)
• Deductions and employer contributions are recorded as payments due to external agencies, to be paid at specific intervals (e.g., monthly)

Once remittances are made, the liability accounts are cleared by crediting bank and debiting the relevant agency accounts.

Worked Example 1.2

Scenario:
Following payment of payroll for April, the liabilities in Midtown Ltd’s books stand at:

• Income tax payable: £1,500
• Social security payable: £850
• Pension contributions payable: £600

On the required date, all these amounts are remitted to the proper agencies.

Question:
How are the payments reflected in the general ledger?

Answer:
For each remittance:

• Debit income tax payable £1,500; Credit bank £1,500
• Debit social security payable £850; Credit bank £850
• Debit pension contributions payable £600; Credit bank £600

After remittance, these liability accounts will have zero balances.

Exam Warning

Be aware that statutory and voluntary deductions remain employer liabilities until paid over—even if already withheld from employee pay. Late remittance can result in penalties.

Summary

Employers must calculate, record, and pay not only net wages but also all payroll deductions and employer contributions. These liabilities are only cleared when paid. Documentation such as payslips and remittance schedules provide evidence and control. Accurate recording is essential for legal compliance and correct financial reporting.

Key Point Checklist

This article has covered the following key knowledge points:

• Identify and distinguish statutory and voluntary payroll deductions
• Record all employer liabilities upon payroll processing
• Prepare accurate payslips and maintain payroll records
• Remit withheld payroll amounts and employer contributions to the correct agencies on time
• Clear payroll liability accounts in the general ledger after remittance

Key Terms and Concepts

• statutory deduction
• voluntary deduction
• net pay
• remittance
• employer liability
• payslip